BitBeat: Bitcoin 2.0 Companies Respond to SEC Rumor: We’re Clean

The story on the Coinfire web site sounded alarming to firms in the “Bitcoin 2.0” arena: the Securities and Exchange Commission had sent inquiries about the issuance of unregistered securities to “hundreds of bitcoin companies.”

The story stirred speculation that these firms’ popular “crowdsale” strategies for raising funds with digital currency could run afoul of SEC rules on share issuance. But so far some of the biggest players in this nascent industry say they haven’t received any communication from the SEC. And while a number said they wouldn’t be surprised if the SEC does dig further into the field, all those reached by BitBeat say they’re confident they are operating within the law. The SEC declined to comment.

The Coinfire report, which included a heavily redacted sample of an SEC letter, said versions of it had gone out to companies that have used a fund-raising software platform developed by Counterparty, which harnesses the bitcoin blockchain ledger and network to allow third-party firms to issue their own digital currencies and tokens.

Co-founder Evan Wagner said Counterparty had not received any letter from the SEC and that he and his colleagues were unaware of any being received by other firms using its software. Either way, he said, Counterparty is not responsible for the actions of these third-party firms.

In a statement, the firm said, “The software that we develop, like all capable software, may be used for both legitimate and illegitimate purposes. We do not condone the creation of unregistered securities on the Counterparty network, but we have no control over their issuance.”

Mr. Wagner said Counterparty’s own internal currency, known as XCP, is not a security. He added that anyone who purchased newly issued XCP with bitcoin did so through a “proof of burn” method that renders the incoming bitcoin unusable, ensuring that no material benefit passes to Counterparty or its owners.

BitBeat received similarly confident assurances from other prominent Bitcoin 2.0 companies, which seek to facilitate decentralized, middleman-free commercial enterprises.

Joseph Lubin, co-founder of Ethereum, a blockchain-based platform that’s independent of bitcoin, said his company had received no letter from the SEC and was confident in the legality of its recent crowdsale exercise, which when it concluded in early September was valued at $18 million. He said internal tokens issued in that sale, known as ether, amounted to software, not securities, and had no contractual rights attached to them. Ether could only be defined as such, he said, because “it is absolutely essential to the proper operation of the decentralized operating environment that we are building.”

David A. Johnston, Chairman of Mastercoin Foundation, said he was confident that issuers of digital tokens on Mastercoin’s bitcoin-based platform have all done “due diligence to make sure they weren’t selling securities.” He too defined them as software, describing these instruments as tools to provide “an efficient way to distribute passwords to users.” Mastercoin had not received an SEC letter, he said, and neither, to his knowledge, had any of its partners.

Meanwhile, BitShares, which uses the eponymous name “bitshares” to describe tokens issued by autonomous, software-driven companies over its independent blockchain-based software, says these are not securities either, despite their name. The implied reference to corporate shares is “an analogy,” says Daniel Larimer, CEO of Invictus Innovations, which developed the BitShares project. “I could use other analogies that view the dollar as stock in the United States. An analogy does not create a security.” The key, he said, is that there is no contract between two parties contained in the digital tokens.

Ultimately, the SEC will decide whether these new bitcoin-like digital tokens, which seem to defy the standard definitions the agency has used in other offerings, constitute securities in need of regulation or whether they amount to unregulated software products or something else. And if the agency is not yet delving into these firms, the attention developed by this latest speculation could stir it into action. (Michael Casey)

[Suspicious link removed]j.com/moneybeat/2014/10/28/bitbeat-bitcoin-2-0-companies-respond-to-sec-rumor-were-clean/